DCIT CIR 8(2), MUMBAI V. PFIZER LTD, MUMBAI

ITA 1202/MUM/2010

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 3076 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2015
• Appeal Filed By: Department
• Bench Allotted: K
• Next Hearing Date: 05-05-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 15-02-2010
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DAY, JUDICIAL MEMBER I.T.A. NO. 1202/M/2010 (AY 2002 - 2003 ) DCIT - 8(2), R.NO. 216 - A, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 20 / VS. M/S. PFIZER LIMITED, PATEL ESTATES, OFF. S.V. ROAD, JOGESWARI (W), MUMBAI - 12. ./ PAN : AAACP3334M ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI N.K. CHAND - CIT DR / RESPONDENT BY : SHRI KANCHUN KAUSHAL / DATE OF HEARING : 15.9 .2015 / DATE OF PRONOUNCEMENT : 16 .10.2015 / O R D E R PER D. KARUNAKARA RAO, AM: THIS APPEAL FILED BY THE REVENUE ON 15.2.2010 IS AGAINST THE ORDER OF THE CIT (A) - 15, MUMBAI DATED 4.12.2009 FOR THE ASSESSMENT YEAR 2002 - 2003. IN THIS APPEAL, REVENUE RAISED THE FOLLOWING GROUND WHICH READS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN DELETING THE PENALTY LEVIED U/S 271(1)(C) OF THE ACT AMOUNTING TO RS. 50,11,923/ - WITHOUT APPRECIATING THE FACTS OF THE CASE. 2. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF PHA RMACEUTICALS, CHEMICALS AND ANIMAL HEALTH PRODUCTS. ASSESSEE FILED THE RETURN OF INCOME DECLARING THE TOTAL INCOME OF RS. 85,50,92,000/ - . IN REGULAR ASSESSMENT, THE ANNUAL INCOME IS DETERMINED AT RS. 103,34,09,040/ - . IN THE ASSESSMENT, THE TPO EXAMINED THE TP STUDIES OF THE ASSESSEE AND SUGGESTED ADJUSTMENTS TO THE TUNE OF RS. 1,40,39,000/ - VIDE HIS ORDER U/S 92CA(3) OF THE ACT, DATED 23.2.2005. THE ADJUSTMENTS ARE MADE IN RESPECT OF ISSUES INVOLVING CLAIMS OF CLINICAL TRIAL SERVICES. THE SAID ADJUST MENTS WERE THE SUBJECT MATTER OF LITIGATION BEFORE THE CIT (A). EVENTUALLY, THE SAID WERE UPHELD AND THE DECISION WAS GIVEN IN FAVOUR OF THE REVENUE. SUBSEQUENTLY, THE ASSESSEE FILED 2 AN APPEAL BEFORE THE TRIBUNAL. THE TRIBUNAL REMANDED THE MATTER TO THE F ILE OF THE AO WITH CERTAIN DIRECTIONS VIDE ITS ORDER IN APPEAL ITA NO.3098/M/2006, DATED 8.3.2013 [ 33 TAXMANN.COM 310]. MEANWHILE, AO LEVIED PE NALTY OF RS. 50,11,923/ - U/S 27 1(1)(C) OF THE ACT VIDE HIS ORDER DATED 30.3.2007 ON THE SAID ADJUSTMENT OF RS. 1,40,39,000/ - . ON APPEAL, CIT (A) DELETED THE SAID PENALTY VIDE HIS ORDER DATED 4.12.2009. CONTENTS OF PARA 9 OF THE SAME ARE RELEVANT FOR THE REASON FOR GRANTING RELIEF. IN BRIEF, CIT (A) HELD THAT THE EXCEPTIONS PROVIDED IN THE EXPLANATION 7 TO SECTIO N 271(1)(C) OF THE ACT COVERS THE ASSESSEES CASE. HE HELD IN PARA 9.7 OF HIS ORDER THAT ASSESSEE SATISFIED BOTH THE CONDITIONS SPECIFIED IN THE SAID EXPLANATION 7. AGAINST THE SAID ORDER OF THE CIT (A), REVENUE IS IN APPEAL BEFORE THE TRIBUNAL BY RAISIN G THE ABOVE MENTIONED GROUNDS. 3. BEFORE US, LD DR FOR THE REVENUE RELIED ON THE ORDER OF THE AO / TPO AND SUBMITTED THAT THE ASSESSEE FAILED IN ADOPTING THE CORRECT COMPARABLES. HE WAS ALSO CRITICAL OF THE DECISIONS OF THE CIT (A) IN THE MATTER. 4. PER C ONTRA, LD COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE CIT (A). FURTHER, HE RELIED ON THE ORDER OF THE TRIBUNAL AND BROUGHT OUR ATTENTION TO THE CONTENTS OF PARA 24 AND SUBMITTED THAT THIS ISSUE OF (I) INCLUSION OF ID COST IN THE TOTAL COST OF RS. 1080.25/ - WAS REMANDED TO THE AO. HE ALSO BROUGHT OUR ATTENTION TO THE DIRECTION OF THE TRIBUNAL AND SUBMITTED THAT THE SAID ADJUSTMENT IS MADE AND THERE IS NO NEED FOR MAKING ADJUSTMENT BY THE TPO. FURTHER, HE ALSO BROUGHT OUR ATTENTION TO PARA 17 AND 2 4 OF THE SAID TRIBUNALS ORDER (SUPRA) AND SUBMITTED THAT THE COMPARABLE SIRO IS A GOOD COMPARABLE NOW AND THE TRIBUNAL DIRECTED THE AO / TPO FOR DOING ADJUSTMENT AFTER AFFORDING AN OPPORTUNITY TO THE ASSESSEE. THIS ISSUE WAS REMANDED TOO. 17. WE HAVE CO NSIDERED THE RIVAL SUBMISSIONS ON THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSEE HAS CHALLENGED THE ACTION OF THE AUTHORITIES BELOW IN EXCLUDING GILICON AND KITCO AND INCLUDING SIRO FOR THE PURPOSE OF COMPARAB ILITY ANALYSIS. AS REGARDS SIRO, IT IS OBSERVED THAT THERE IS A FUNCTIONAL SIMILARITY BETWEEN THE SAID COMPANY AND THE ASSESSEE COMPANY IN AS MUCH AS BOTH OF THEM ARE ENGAGED IN THE BUSINESS OF PROVIDING SERVICES RELATING TO CLINICAL TRIALS. THE DIFFERENCE IS ONLY IN THE BUSINESS MODEL ADOPTED BY THESE TWO COMPANIES IN AS MUCH AS SIRO IS DOING THE CLINICAL TRIALS ON ITS OWN WHERE AS THE ASSESSE COMPANY IS GETTING THE CLINICAL TRIALS DONE FROM THE THIRD PARTIES. IN OUR OPINION, THIS DIFFERENCE IN BUSINESS MO DEL ADOPTED BY SIRO CANNOT BE THE BASIS TO EXCLUDE THE SAID COMPANY FROM THE COMPARABILITY ANALYSIS ESPECIALLY WHEN THERE IS A FUNCTIONAL SIMILARITY IN THE MAIN BUSINESS CARRIED ON BY SIRO AS WELL AS BY THE ASSESSEE - COMPANY WHICH IS THAT OF 3 PROVIDING SERVI CES IN RELATION TO CLINICAL TRIALS. IT IS ALSO PERTINENT TO NOTE IN THIS CONTEXT THAT THERE ARE VERY FEW COMPARABLES AVAILABLE WHICH ARE ENGAGED IN THE BUSINESS OF PROVIDING SERVICES RELATING TO CLINICAL TRIALS AND THE ASSESSEE COMPANY IN FACT HAS TAKEN CO MPARABLES WHICH ARE IN THE BUSINESS OF PROVIDING BUSINESS CONSULTANCY SERVICES FOR THE PURPOSE OF COMPARABILITY ANALYSIS. WE THEREFORE FIND MERIT IN THE ARGUMENT OF THE LD. DR THAT SIRO SHOULD BE INCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYSIS AND WHAT AT THE MOST CAN BE DONE IS TO MAKE CERTAIN ADJUSTMENTS ON ACCOUNT OF DIFFERENT BUSINESS MODEL ADOPTED BY THE SAID COMPANY AS HAS BEEN DIRECTED BY THE TRIBUNAL IN THE CASE OF ZYDUS ALTANA HEALTHCARE P. LTD. (SUPRA). ACCORDINGLY, WE DIRECT THE AO/TPO TO MAKE SUCH ADJUSTMENTS AFTER TAKING INTO CONSIDERATION THE RELEVANT FACTS AND AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD ON THIS ASPECT. 18..... 19.... 20.... 21.... 22.... 23.... 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RE LEVANT MATERIAL ON RECORD. WE AGREE IN PRINCIPLE WITH THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE ON THIS ISSUE THAT IF THE INDIRECT COST WAS ALREADY INCLUDED BY THE ASSESSEE IN THE TOTAL COST OF RS. 1080.25 LAKHS INCURRED IN RELATION TO THE SERVICE S PROVIDED TO ITS AE FOR APPLYING THE MARK UP OF 10%, THERE IS NO JUSTIFICATION IN ADDING INDIRECT COST @ 5% OF THE DIRECT COST SEPARATELY AS DONE BY THE AUTHORITIES BELOW RELYING ON THE TERMS OF THE RELEVANT AGREEMENT. HOWEVER, AS SUBMITTED BY THE LD. DR, THE STAND TAKEN BY THE ASSESSEE ABOUT INCLUSION OF INDIRECT COST OF RS. 285.48 CRORES IN THE TOTAL COST OF RS. 1080.25 LAKHS BASED ON THE BREAK - UP GIVEN ON PG.NOS. 58 & 59 OF THE PAPER BOOK REQUIRES VERIFICATION AS THERE IS NO REFERENCE TO ANY SUCH DETAIL S FURNISHED BY THE ASSESSEE IN THE ORDER OF THE AUTHORITIES BELOW NOR THERE IS ANY FINDING GIVEN ON VERIFICATION OF SUCH DETAILS. SINCE THE LD. COUNSEL FOR THE ASSESSEE ALSO HAS NO OBJECTION IN THIS REGARD, WE RESTORE THIS ISSUE TO THE FILE OF THE AO TO VE RIFY FROM THE RELEVANT RECORD, THE STAND TAKEN BY THE ASSESSEE THAT INDIRECT COST OF RS. 285.48 LAKHS WAS ALREADY INCLUDED IN THE TOTAL COST OF RS. 1080.25 LAKHS AND IF THE SAME IS FOUND TO BE CORRECT, THE AO IS DIRECTED NOT TO ADD SEPARATELY INDIRECT COST @ 5% OF THE DIRECT COST FOR THE PURPOSE OF TRANSFER PRICING EXERCISE. GROUND NO. 2(D) IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 5. NARRATING THE ABOVE TWO PARAGRAPHS, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE MAJOR ISSUES WERE REM ANDED TO THE FILE OF THE AO / TPO. IN THAT CASE, THE ADJUSTMENTS STAND DELETED. IN SUCH CIRCUMSTANCES, THE PENALTY DOES NOT SURVIVE. LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO MAY REINITIATE THE PENALTY U/S 271(1)(C) OF THE ACT, IN CASE THE ADJUS TMENTS AGAIN MADE TO THE TOTAL INCOME. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE RELEVANT MATERIAL PLACED BEFORE US. WE HAVE ALSO GONE THROUGH THE TRIBUNAL ORDER (SUPRA), DATED 8.3.2013 IN GENERAL A ND PARA 17 TO 24 IN PARTICULAR. THE HELD PORTION OF THE SAID DECISION READ AS FOLLOWS: - I. SECTION 92C OF THE INCOME TAX ACT, 1961 TRANSFER PRICING COMPUTATION OF ARMS LENGTH PRICE [ COMPARABLES AND ADJUSTMENTS] ASSESSMENT YEAR 2002 - 2003 ASSESSE E, PHARMACEUTICAL COMPANY, PROVIDED CLINICAL TRIAL SERVICES TO ITS OVERSEAS 4 ASSOCIATED ENTERPRISES BY OUTSOURCING SAME TO THIRD PARTIES IT IDENTIFIED FIVE COMPARABLES TPO REJECTED TWO COMPARABLES, G AND K, SELECTED BY ASSESE AND ADDED ONE MORE COMPARAB LE S AND MADE TRANSFER PRICING ADJUSTMENT ASSESSEE CHALLENGED EXCLUSION OF G AND K AND INCLUSION OF S IN LIST OF COMPARABLES WHETHER WHERE ASSESSEE WAS OUTSOURCING CLINICAL TRIALS TO THIRD PARTIES, COMPANY ENGAGED IN DOING SAME BUSINESS BY ITSELF COULD BE TAKEN AS A COMPARABLE HELD, YES WHETHER COMPANY ENGAGED IN A BUSINESS FUNCTIONALLY DIFFERENT FROM THAT OF ASSESSEE COULD NOT BE TAKEN AS A COMPARABLE HELD, YES WHETHER COMPANY CONSISTENTLY MAKING OPERATING LOSS COULD BE EXCLUDED FROM LIST OF CO MPARABLES HELD, YES [PARAS 17, 18 AND 19]. II. SECTION 92C OF THE INCOME TAX ACT, 1961 TRANSFER PRICING COMPUTATION OF ARMS LENGTH PRICE [COMPARABLES AND ADJUSTMENTS] ASSESSEE COMPANY COMPUTED OPERATING MARGIN TO COST AT 10PER CENT IN RELATION TO ITS INTERNATIONAL TRANSACTIONS IT CLAIMED THAT SAID COST WAS TOTAL COST INCLUDING BOTH DIRECT AND INDIRECT COST HOWEVER, TPO MADE ADDITION OF INDIRECT COST AT 5 PERCENT OF DIRECT COST ON GROUND THAT THERE WERE NO DETAILS SHOWING BIFURCATION OF DIRECT A ND INDIRECT COST IN TOTAL AMOUNT OF COST WHETHER, WHERE THERE WERE NO DETAILS, MATTER REGARDING ADDITION OF INDIRECT COST SEPARATELY WAS TO BE REFERRED BACK TO ASSESSING OFFICER FOR FURTHER VERIFICATION HELD, YES [PARA 28] [MATTER REMANDED]. 7. FROM THE ABOVE, IT IS EVIDENT THAT THE TWO PROMINENT ISSUES ARE REMANDED TO THE FILE OF THE AO / TPO. THUS, THE VERY BASIS FOR MAKING ADJUSTMENTS STAND REMANDED TO AO / TPO. THEREFORE, ON MERITS OF ADJUSTMENTS, THE ASSESSEE GOT PART RELIEF. CONSEQUENTLY , PENALTY LEVIED ON THE ABOVE RELIEF DOES NOT SURVIVE. AO IS FREE TO INITIATE PENALTY U/S 271(1)(C) OF THE ACT AFTER ORDER OF THE TRIBUNAL IS GIVEN EFFECT AND THE ADDITIONS ARE MADE AT THE END OF THE PROCEEDINGS . EX - CONSEQUENTI , IN OUR OPINION THE ORDER OF THE CIT (A) IS FAIR AND REASONABLE. ACCORDINGLY, THE EFFECTIVE GROUND RAISED BY THE REVENUE IS DISMISSED. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 6 T H OCTOBER, 2015. S D / - S D / - (SAKTIJIT DAY) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 1 6 .10 .2015 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, 5 ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI